DAR File No. 38702

Governor, Economic Development

Rule R357-7

Utah Capital Investment Board

Notice of Proposed Rule

(Repeal and Reenact)

DAR File No.: 38702
Filed: 07/09/2014 03:57:18 PM

RULE ANALYSIS

Purpose of the rule or reason for the change:

The rule change provides a more comprehensive outline for the Utah Capital Investment Board's processes and procedures in carrying out their statutory mandate.

Summary of the rule or change:

The current rule states in generic form how the Utah Capital Investment Board is to conduct its affairs. This rule states the board is to provide staff, determine the approval or denial of an application for a tax credit, and approve or deny the purchasing of a tax credit by a designated purchaser. The new rule outlines how the Utah Capital Investment Board conducts its affairs and statutory mandates with more specificity. Specifically, the rule outlines the requirements of the Utah Capital Investment Corporation to receive a tax credit, allocation and issuance of certificates, procedures for certification of tax credits, irreconcilability of tax credits, transfer of tax credits, cancellation of tax credits, replacement of lost or mutilated tax credits, redemption of the tax credits, criteria for redemption by designated investors, establishes the targeted rate of return, the maintenance of the certificate of registry.

State statutory or constitutional authorization for this rule:

• Section 63M-1-1218
• Section 63M-1-1206
• Section 63M-1-1213
• Section 63M-1-1220

Anticipated cost or savings to:

the state budget:

The office considered if implementing the new rule would change or require additional staffing or other administrative costs to accomplish its directives. In considering this the office determined there will be no cost or savings because this new rule outlines the practices that are already in place.

local governments:

The office assessed whether local governments would be impacted by this rule in considering local governments role in venture capitalism and investing. The office determined there is no impact to local governments because they do not generally become involved in investing and venture capitalism.

small businesses:

The office assessed whether or not small businesses are heavily involved in venture capitalism and how these rules could impact those businesses. Although some small businesses may be involved in venture capitalism and investments, this new rule only outlines the practice that has already been followed by the board so no new or additional costs would be placed upon small businesses by this new rule.

persons other than small businesses, businesses, or local governmental entities:

The office considered all other possibly impacted parties and determined that because this rule outlines the practices of the board that have always been in place there are no new costs to any entity by this new rule.

Compliance costs for affected persons:

There is no cost for compliance because all affected parties are already in compliance.

Comments by the department head on the fiscal impact the rule may have on businesses:

There are no fiscal impacts that need to be addressed.

Sophia Dicaro, Executive Director

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Governor
Economic Development
60 E SOUTH TEMPLE 3RD FLR
SALT LAKE CITY, UT 84111

Direct questions regarding this rule to:

• Jeffrey Van Hulten at the above address, by phone at 801-538-8694, by FAX at 801-538-8888, or by Internet E-mail at jeffreyvan@utah.gov

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

09/02/2014

This rule may become effective on:

09/09/2014

Authorized by:

Spencer Eccles, Executive Director

R357. Governor, Economic Development.

R357-7. Utah Capital Investment Board.

[R357-7-1. Purpose.

(1) The purpose of these rules is to establish the manner by which the Utah Capital Investment Board (UCIB) conducts its affairs.

 

R357-7-2. Authority.

(1) UCA 63M-1-1206 requires the UCIB to make rules establishing the manner by which it conducts its affairs.

 

R357-7-3. Conduct.

The UCIB conducts its affairs to best meet its objectives of mobilizing venture equity capital for investment in a manner that will result in a significant potential to create jobs and to diversify and stabilize the economy of the state. The UCIB conducts its affairs in a way to meet these objectives by:

(1) Making staff available to present potential tax credit agreements to the UCIB and Utah Capital Investment Corporation (UCIC) for approval;

(2) Reviewing and approving or denying potential agreements with financial entities within ninety (90) days of presentation to the UCIB;

(3) If approved by the UCIB, issuing contingent tax credit certificates to designated investors for the allocation and issuance of contingent tax credits;

 

]R357-7-1. Purpose.

(1) The purpose of these rules is to establish criteria and procedures for the allocation and issuance of contingent tax credits to designated investors.

 

R357-7-2. Authority.

(1) U.C.A. 63M-1-1206, 63M-1-1213, 63M-1-1218 and 63M-1-1220 requires the Utah Capital Investment Board to make rules establishing the manner by which it allocates, issues, certifies, transfers and redeems contingent tax credits.

 

R357-7-3. Definitions.

(1) "Act" means the Utah Venture Capital Enhancement Act U.C.A. 63M-1-1201.

(2) "Actual Return" means the actual aggregate amount of moneys or the fair market value of property received from a fund of funds by a designated investor, with respect to an investment amount for which a certificate is issued, including amounts received as returns of invested capital or returns on invested capital and amounts received in excess of invested capital, in whatever form received for the period from the date of the closing to the applicable maturity date.

(3) "Board" means the Utah Capital Investment Board created under U.C.A. 63-M-1-1203 (1)

(4) "Certificate" or "tax credit certificate" means a document constituting a contract between the state of Utah and a holder and evidencing a tax credit that has been issued and, subject to the contingencies described on the certificate that may become available to the holder.

(5) "Certificate register" means the register to be maintained by the board recording the name, address, and taxpayer identification number of each holder and the maximum potential amount of the tax credits represented by each certificate issued to each holder.

(6) "Certified tax credits" means tax credits that have been verified by the board to the commission and to the holder of the certificate that represents such tax credits.

(7) "Closing" means a time when a certificate is issued to a designated investor in exchange for a commitment to contribute cash to the capital of a fund of funds.

(8) "Commission" means the Utah State Tax Commission.

(9) "Commitment" means either a binding obligation undertaken at closing to invest in a fund of funds in the future or an actual investment made in a fund of funds, but without counting the same amount twice.

(10) "Contingencies" shall mean the conditions under which a tax credit may be claimed and shall include each of the following;

(a) The condition that the tax credits may only be used to the extent that the actual return on the investment amount associated with the certificate is less than the applicable scheduled return on such investment amount, and then only to the extent such tax credit becomes a certified tax credit.

(b) The condition that the amount of the total verified tax credits represented by such certificate that may be claimed during any redemption year will be limited to the amount certified by the board to the commission.

(c) The condition that no amount of the tax credit may be claimed prior to a maturity date stated on the certificate; and

(d) The condition that the receipt by the designated investor of an actual return on the investment amount associated with the certificate equal to the scheduled return on such investment amount will result in the cancellation of the tax credit certificate.

(11) "Corporation" means the Utah Capital Investment Corporation created under Section U.C.A. 63M-1-1207.

(12) "Day" means any weekday Monday through Friday that is not a legal holiday of the state of Utah.

(13) "Designated investor" means a natural person or an entity, other than the corporation, that has committed to contribute capital to a fund of funds, and such person's or entity's successors or assignees.

(14) "Designated purchaser" means:

(a) a person who enters into a written undertaking with the board to purchase a commitment; or

(b) a transferee who assumes the obligations to make the purchase described in the commitment.

(15) "Fiscal year" means the fiscal year for the state of Utah.

(16) "Fund of funds" means any private, for-profit limited partnership or limited liability company established by the corporation to which a designated investor commits to make a capital contribution.

(17) "Holder" means a holder of a tax certificate, either as a designated investor or as a transferee of a designated investor, as reflected on the certificate register.

(18) "Investment amount" means the amount of cash contributed by a designated investor to a fund of funds with respect to which a certificate has been issued.

(19) "Maturity date" means a specific date or dates specified in a certificate, representing the earliest date of which a holder of the certificate may use it.

(20) "Percentage of Return" means the percentage represented by the quotient of (1) the actual return for a designated investor on the investment amount associated with a certificate divided by (2) the scheduled return for such designated investor on such investment amount.

(21) "Portfolio entity" means a venture capital fund or direct investment entity in which a fund of funds makes an investment.

(22) "Rate of return" means Internal Rate of Return calculated inclusive of all cash flows both positive and negative in addition to the fair market value of unrealized investments.

(23) "Redeem" means, with respect to a certificate, to present such certificate to the commission as payment due on or after the date of such presentation.

(24) "Redemption reserve" means the reserve established by the corporation to facilitate the cash redemption of certificates.

(25) "Redemption year" means each calendar year for which certified tax credits associated with a certificate may first be utilized.

(26) "Scheduled return" means the scheduled return, whether in money or property, (including returns of and returns on investment) with respect to an investment amount associated with a certificate issued to a designated investor in a fund of funds determined in accordance with the limited partnership agreement or the operating agreement of such fund of funds for the period from the date of the closing to the applicable maturity date. If relevant for determining the amount of the scheduled return, the board shall presume that a verified credit will be transferred at 100 percent of the amount stated on the certified tax credit. It shall be the burden of a designated investor to show that the certified tax credit cannot be transferred without discounting the amount stated on such credit.

(27) "Tax credit" means a contingent, refundable tax credit authorized by U.C.A. 63M-1-1218(4)(e).

 

R357-7-4. Requirements of the Utah Capital Investment Corporation.

(1) Within 20 days prior to each closing, the corporation shall deliver a written report to the board containing the following information:

(a) a copy of the certificate of limited partnership or articles of organization of the fund of funds for which a closing is scheduled;

(b) a summary of the terms of the anticipated investments in such fund of funds as contained in the limited partnership agreement or the operating agreement of the funds of funds;

(c) a statement of the anticipated date of the closing; and

(d) evidence that the designated investor is an accredited investor.

(2) No less than two days prior to each closing, the corporation shall deliver to the board a signed statement of an officer of the corporation certifying the names, addresses, and taxpayer identification numbers of the persons expected to be designated investors at the closing, the total amount of the capital commitments expected to be received at the closing, the maximum amount of tax credits to be represented by each certificate to be issued at the closing, the date of the anticipated closing, the maturity date or dates for each certificate to be issued at closing, the contingencies applicable to the tax credits, and the calculation formula for determining the scheduled return.

 

R357-7-5. Allocation and Issuance of Certificates.

(1) Certificates shall be issued only by the board and only with respect to an actual capital commitment to a fund of funds. The board shall not issue a certificate until it has verified that the Utah Fund of Funds has agreed to treat the tax credits as a loan from the state of Utah, and the terms for the repayment of the loan.

(2) Following receipt of the certification of the corporation, the board shall issue a certificate to each such designated investor at closing.

(3) The maximum amount of the tax credits represented by each certificate shall be calculated in accordance with the limited partnership agreement or operating agreement of the applicable fund of funds or loan agreement between a designated investor and a fund of funds and will be subject to the limitations stated in the U.C.A. 63M-1-1218 (2)(a)(c).

(4) A tax credit certificate shall contain, or incorporate by reference to another document, each of the following:

(a) the name, address, and tax identification number of the holder;

(b) the amount of the investment commitment;

(c) all of the contingencies applicable to the tax credits;

(d) the date of issuance of the certificate;

(e) the maximum amount of the tax credit represented by the certificate;

(f) the maturity date of the certificate;

(g) the formula to be used to determine the total amount of return owed to the designated investor;

(h) if the certificate is issued upon a transfer after certification, the amount of the certified tax credits represented by such certificate and the redemption year(s); and

(i) the credit code to use to claim the credit on the Utah State tax return.

(5) All other requirements as set forth in U.C.A. 63M-1-1218(6).

 

R357-7-6. Procedures for Certification of Tax Credits.

(1) At any time after the applicable maturity date for a certificate, the holder may present such certificate to the board for certification no later than June 30 of the calendar year maturity date stated on the certificate.

(2) Prior to certification the board will verify that no funds are available in the redemption reserve account.

(3) The corporation, and any entity with which the corporation has entered into agreements pursuant to the investments and financial transactions described in U.C.A. 63M-1-1207(2)(e), shall provide all documents that the board finds are, or may become, necessary for the board to certify the amount of tax credits to be issued pursuant to the chapter. Such documents include but are not limited to the following:

(a) Financial transactions related to the corporation, the Utah Fund of Funds, designated investors, lenders, or portfolio entities.

(b) Financial documents, loan agreements, and security instruments to which any of the corporation, the Utah Fund of Funds, designated investors, lenders, or a portfolio entity is a party.

(c) Investment agreements to which any of the corporation, Utah Fund of Funds, designated investors, lenders, or a portfolio entity is a party.

(d) All legal documents and correspondence outlined herein to which any of the corporation, the Utah Fund of Funds, designated investors, lenders, or a portfolio entity is a party.

(e) All documents and financial information necessary to calculate the actual return, scheduled return, and the percentage of return.

(f) Any other documents the board deems necessary to assess compliance with this chapter or to correctly verify the amount of tax credits related to a certificate issued pursuant to this chapter.

(4) Within 30 days of the receipt of all documents and information pursuant to subsection (3) the board shall establish and certify the amount of tax credits related to that certificate, if any, which may be initially used in each redemption year.

(5) The board shall issue to the holder of such certificate a certification setting forth (a) the amount of certified tax credits represented by such certificate (if any) and (b) the amount of certified tax credits represented by such certificate and redemption year (if any).

(6) If the certified certificate has more than one maturity date, the board shall issue to the holder a certificate for the certified tax credits. The certified certificate will contain no contingencies. The board shall issue one or more balance certificates for any maturity dates for which the tax credits are not then being certified.

(7) Certificates being certified for a maturity date shall be certified pro rata with all other certificates being certified for the same maturity date.

(8) If a contingent certificate has more than one maturity date, the most recent maturity date prior to the date on which the certificate was presented to the board for certification shall be the maturity date used for purposes of certification under this rule.

(9) Once a tax credit has been certified, the board will notify the Commission of such certification within 7 days.

 

R357-7-7. Contractual Nature of Certificates; Irrevocability of Tax Credits.

(1) Upon the issuance of a certificate, the entitlement of a holder to use the tax credits represented by the certificate shall be final and permanent, subject only to the contingencies expressly stated or incorporated by reference in the certificate, and such entitlement shall not be subject to any further condition, reduction, modification, amendment, change, revocation, or recapture.

(2) The entitlement of a holder to claim tax credits represented by a certificate shall constitute a contract between the state of Utah on the one hand and such holder and the holder's successors and assignees on the other hand which shall not be subject to modification, amendment, change or rescission without prior written consent of the holder as of the date of any such purported action. No such modification, amendment, change or recession to which a holder may have agreed shall be binding upon any of the successors or assignees of such holder unless it is stated in the text of the certificate issued to such successor assignee.

(3) The entitlement of a holder to claim tax credits represented by such certificate shall not be affected in any way or become subject to forfeiture or recapture by:

(a) Action or inaction of the holder or designated investor;

(b) The transfer by the designated investor of all our any portion of the designated investor's interest in a fund of funds;

(c) The determination after the closing that a fund of funds was not organized or did not make its investments in accordance with the requirements of the Act or these rules;

(d) The invalidity or illegality for any reason of the existence or functions of the board, a fund of funds, or the corporation or any portfolio entity for any reason;

(e) The bankruptcy, insolvency, reorganization, merger, consolidation, dissolution or liquidation of the board, a fund of funds, or the corporation or any portfolio entity for any reason; or

(f) The level, timing or degree of success of any fund of funds or any portfolio entities, or the extent to which venture capital funds that are portfolio entities are invested in Utah venture capital projects, or are successful in accomplishing any economic development objective.

(4) If the legal existence of the board, a fund of funds, the corporation or the commission is ended or some or all of its respective functions are transferred to another entity at any time prior to the full use of 100 percent of the tax credits that could potentially be represented by all of the certificates, the board or its successor (or the state of Utah if the legal existence of the board ends or the board ceases to have the requisite authority and there is no successor with such authority) shall adopt such rules as may be necessary to ensure the continuity and effectiveness of the entitlement of each holder to use the tax credits represented by such holder's certificate.

 

R357-7-8. Transfer of Tax Credit Certificates.

(1) Certificates shall be transferrable by the holders and any subsequent holders to any transferee or transferees.

(2) Transfer of a certificate may be effected only by the holder's surrender of the certificate to the board with an endorsement in favor of the transferee, or transferees, and a statement containing the name, address and tax identification number of the transferee, and a written request for the board to issue a replacement certificate or certificates in the name of the transferee(s) (as well as, in any case where the transferor request that more than one replacement certificate be issued, a statement by the transferor that sets forth the aggregate amount of tax credits represented by the transferred certificate that are to be represented by each replacement certificate).

(3) Within 20 days after the surrender and endorsement of a certificate, the board shall issue a replacement certificate or certificates in the name of the transferee(s). Once a transferor of a certificate has surrendered a certificate to the board, such transferor may no longer use the tax credits represented by such a certificate.

(4) A holder shall have the right to pledge and grant security interests in certificates and tax credits held by such holder as collateral for loans to or other obligations of the holder.

 

R357-7-9. Cancellation of Tax Credits Upon Receipt of the Scheduled Return.

(1) Tax credits represented by a certificate are subject to cancellation only as provided in the certificate and upon receipt by the designated investor of an actual return equal to the designated investor's scheduled return with respect to such certificate.

(2) At the time of each distribution to a designated investor in a fund of funds, the corporation shall determine the amount of tax credits related to each certificate that have been cancelled and have become null and void by reason of such distribution, if any, and shall certify such amount to the board.

(a) After any such certification, the board shall certify to the holder of each such certificate, at the holder's address as shown on the certificate register, and to the commission the amount of tax credits that are deemed to have been cancelled and to be null and void.

(b) If at any time prior to a certification of a certificate the actual return of a designated investor shall equal the designated investor's scheduled return with respect to such a certificate, and all other conditions for cancellation contained in the certificate have been met, the corporation shall so certify to the board.

(c) After any such certification, the board shall certify to such holder at the holder's address shown on the certificate register and to the commission that such certificates shall be deemed to have been cancelled and to be null and void. Tax credits that are cancelled may be reissued with respect to the same or another fund of funds.

 

R357-7-10. Lost or Mutilated Tax Credit Certificates.

Upon receipt of evidence satisfactory to the board of the loss, theft, destruction or mutilation of any certificate, and in case of any such loss, theft or destruction, upon delivery of any indemnity agreement satisfactory to the board, or in case of any such mutilation, upon surrender and cancellation of such certificate, the board shall issue an deliver to the holder a replacement certificate within twenty days.

 

R357-7-11. Redeeming the Tax Credit Certificates.

(1) Once certified by the board, the holder of the tax credit certificate may present such certificate to the commission for redemption subject to the following provisions:

(a) The contingent tax credit certified by the board shall be claimed for a tax year of the designated investors, or transferee, that begins during the same year as the stated maturity date listed on such certificate. The designated investor (or a transferee of the Certified Contingent Credit) may submit to the commission at any time following the date of such certification by the board, but no later than the general filing deadline for Utah State tax returns (including extensions) for the redemption year.

(b) The person or entity claiming a refund must timely file a Utah State tax return claiming a refundable credit; and no other filing or forms or actions are necessary, and no other conditions apply, for obtaining a refund in respect of such tax credit. The commission will manually process a tax return with a claim for refund certified by the board and will pay the amount indicated on such tax return (such payment generally, but not always, made within ninety (90) days from the date for such return (the "Due Date")). If the board notified the commission of the filing of a claim for refund by the designated investor, the commission will take steps to expedite the refund.

(2) There is no limitation on a person:

(a) filing more than one claim for refund with the commission, or

(b) receiving more than one refund from the commission, in each case, in any one calendar year or other twelve (12) month period.

(3) If an entity is not otherwise a Utah taxpayer, its taxable year, for purposes of the Utah Act, shall be considered to end annually on the same date that its tax year ends for US federal income tax purposes. For a disregarded entity that is not otherwise a Utah taxpayer, such entity may designate any date on which its taxable year ends by stating such date on the Utah tax return on which it files its claim for refund.

(4) If the investor or any transferee is a corporation or other business organization or entity included in a combined Utah state tax return, and such tax return claims a tax credit, the commission will treat such tax credit as a refundable credit for the combined group.

 

R357-7-12. Criteria and Procedures for Assessing the Likelihood of Future Certificate Redemptions by Designated Investors.

(1) On an annual basis, the corporation staff and/or the Allocation Manager will provide the board with a comprehensive report including the following:

(a) a detailed accounting of cash outflows and cash inflows from fund investments during the year.

(b) a detailed accounting of payments made to lenders or equity investors during the year.

(c) a detailed accounting of management fees paid to the corporation during the year.

(d) a detailed accounting of increases or decreases in unrealized value during the year.

(e) a five year projection of cash flows with sensitivity around investment returns, interest rates, and distribution pacing.

(f) third party audit of the Utah Fund of Funds including asset valuation.

(g) verification of individual portfolio fund IRR.

 

R357-7-13. Target Rate of Return or Range of Returns on Venture Capital Investments of the Utah Fund of Funds.

The target rate of return on venture capital investments of the Utah Fund of Funds is a minimum of 5%. The corporation will submit to the board annually a detailed accounting of the calculation of the rate of return. It is understood by the board that the fund that returns in the early years of the fund will likely be negative.

 

R357-7-14. Certificate Registry.

A certificate register detailing all transactions involving the certificates shall be held and maintained at the Office of the Utah Treasurer.

 

KEY: economic development, capital investments

Date of Enactment or Last Substantive Amendment: [January 24, ]2014

Authorizing, and Implemented or Interpreted Law: 63M-1-1206